Across Tax Mountains Assessing the Impact of Competition on the Laffer Curve

Regarding states and state-like entities as producers and taxation as a price for the goods and services provided by State, and, more importantly, as a price for the existence of the State itself, this study connects the thoroughly studied impacts of the market structures in microeconomics to the controversial Laffer curve, suggesting that the outcome of the ―taxation market‖ depends also on the nature of the competitive environment among political units. By studying the determinants for Property Tax revenue for the 308 Portuguese municipalities from 2009 to 2012, two kinds of models are developed: the general model, which aims to give the best possible explanation for tax revenue; and what we call the rate-revenue model, concerned solely about the relationship between tax revenue and tax rate. Competition is incorporated by assigning the municipalities of each Portuguese NUTS III region to a competitive level (low, average or high), which is determined by the well-known and documented regional asymmetries in Portugal, and modeled through dummy variables or sub-sampling. Results show that municipalities in more (less) competitive regions have higher (lower) tax revenue for a given tax rate, both in the general and in the rate-revenue models. As to the relationship between tax rates and tax revenue, the results are mixed: the general models adopt a linear structure; while evidence is found for the existence of a multiple-peaked Laffer curve in the rate-revenue models, the Laffer curve being likewise impacted by competition, causing more competitive municipalities to maximize revenue at lower tax rates—i.e. lower prices—than those in a more monopolistic setting.